(a) Purpose and scope.—This section provides
rules for making the annual election under section 1294. Under that section, a U.S. person that is a
shareholder in a qualified electing fund (QEF) may elect to extend the time for payment of its tax
liability which is attributable to its share of the undistributed earnings of the QEF. In general, a
QEF is a passive foreign investment company (PFIC), as defined in section 1296, that makes the
election under section 1295. Under section 1293, a U.S. person that owns, or is treated as owning,
stock of a QEF at any time during the taxable year of the QEF shall include in gross income, as
ordinary income, its pro rata share of the ordinary earnings of the QEF for the taxable year and, as
long-term capital gain, its pro rata share of the net capital gain of the QEF for the taxable year. The
shareholder’s share of the earnings shall be included in the shareholder’s taxable year in which or
with which the taxable year of the QEF ends.
(b) Election to extend time for payment.—
(1) In general.—A U.S. person that is a shareholder
of a QEF on the last day of the QEF’s taxable year may elect under section 1294 to extend the time
for payment of that portion of its tax liability which is attributable to the inclusion in income
pursuant to section 1293 of the shareholder’s share of the QEF’s undistributed earnings. The
election under section 1294 may be made only with respect to undistributed earnings, and interest
is imposed under section 6601 on the amount of the tax liability which is subject to the extension.
This interest must be paid on the termination of the election.
(2) Exception.—An election under this § 1.1294-1T cannot be made for a taxable year of
the shareholder if any portion of the QEF’s earnings is includible in the gross income of the
shareholder for such year under either section 551 (relating to foreign personal holding compa-
nies) or section 951 (relating to controlled foreign corporations).
(3) Undistributed earnings.—
(i) In general.—For purposes of this § 1.1294-1T the term
“undistributed earnings means the excess, if any, of the amount includible in gross income by
reason of section 1293(a) for the shareholder’s taxable year (the includible amount) over the sum
of (A) the amount of any distribution to the shareholder during the QEF’s taxable year and (B) the
portion of the includible amount that is attributable to stock in the QEF that the shareholder
transferred or otherwise disposed of before the end of the QEF’s year. For purposes of this
paragraph, a distribution will be treated as made from the most recently accumulated earnings and
profits.
(ii) Effect of a loan, pledge or guarantee.—A loan, pledge, or guarantee described in
§ 1.1294-1T(e)(2) or (4) will be treated as a distribution of earnings for purposes of paragraph
(b)(3)(i)(A). If earnings are treated as distributed in a taxable year by reason of a loan, pledge or
guarantee described in § 1.1294-1T(e)(2) or (4), but the amount of the deemed distribution
resulting therefrom was less than the amount of the actual loan by the QEF (or the amount of the
loan secured by the pledge or guarantee), earnings derived by the QEF in a subsequent taxable
year will be treated as distributed in such subsequent year to the shareholder for purposes of
paragraph (b)(3)(i)(A) by virture of such loan, but only to the extent of the difference between the
outstanding principal balance on the loan in such subsequent year and the prior years’ deemed
distributions resulting from the loan. For this purpose, the outstanding principal balance on a loan
in a taxable year shall be treated as equal to the greatest amount of the outstanding balance at any
time during such year.
Example (1).
(i) Facts. FC is a PFIC that made the election under section 1295 to be
a QEF for its taxable year beginning January 1, 1987. S owned 500 shares, or 50 percent, of FC
throughout the first six months of 1987, but on June 30, 1987 sold 10 percent, or 50 shares, of the
FC stock that it held. FC had $100,000x of ordinary earnings but no net capital gain in 1987. No
part of FC’s earnings is includible in S’s income under either section 551 or 951. FC made no
distributions to its shareholders in 1987. S’s pro rata share of income is determined by attributing
FC’s income ratably to each day in FC’s year. Accordingly, FC’s daily earnings are $274x
($100,000x/365). S’s share of the earnings of FC is $47,484x, determined as follows.
| FC’s daily earnings |
× | number of days percentage held by S |
× | percentage of ownership in FC. |
Accordingly, S’s pro rata share of FC’s earnings for the first six months of FC’s year deemed
earned while S held 50 percent of FC’s stock is $24,797x ($274x × 181 days × 50%). S’s pro rata
share of FC’s earnings for the remainder of FC’s year deemed earned while S held 45 percent of
FC’s stock is $22,687x ($274x × 184 days × 45%). Therefore, S’s total share of FC’s earnings to be
included in income under section 1293 is $47,484x ($24,797x + $22,687x).
(ii) Election. S intends to make the election under section 1294 to defer the payment
of its tax liability that is attributable to the undistributed earnings of FC. The amount of current
year undistributed earnings as defined in § 1.1294-1T(b)(3) with respect to which S can make the
election is the excess of S’s inclusion in gross income under section 1293(a) for the taxable year
over the sum of (1) the cash and other property distributed to S during FC’s tax year out of
earnings included in income pursuant to section 1293(a), and (2) the earnings attributable to stock
disposed of during FC’s tax year. Because S sold 10 percent, or 50 shares, of the FC stock that it
held during the first six months of the year, 10 percent of its share of the earnings for that part of
the year, which is $2,480x ($24,797x × 10%), is attributable to the shares sold. S therefore cannot
make the election under section 1294 to extend the time for payment of its tax liability on that
amount. Accordingly, S can make the election under section 1294 with respect to its tax on
$45,004x ($47,484x less $2,480x), which is its pro rata share of FC’s earnings, reduced by the
earnings attributable to the stock disposed of during the year.
Example (2).
(i) Facts. The facts are the same as in Example (1) with the following
exceptions. S did not sell any FC stock during 1987. Therefore, because S held 50 percent of the
FC stock throughout 1987, S’s pro rata share of FC’s ordinary earnings was $50,000x, no part of
which was includible in S’s income under either section 551 or 951. There were no actual
distributions of earnings to S in 1988. On December 31, 1987, S pledged the FC stock as security
for a bank loan of $75,000x. The pledge is treated as a disposition of the FC stock and therefore a
distribution of S’s share of the undistributed earnings of FC up to the amount of the loan principal.
S’s entire share of the undistributed earnings of FC are deemed distributed as a result of the
pledge of the FC stock. S therefore cannot make the election under section 1294 to extend the
time for payment of its tax liability on its share of FC’s earnings for 1987.
(ii) Deemed distribution. In 1988, FC has ordinary earnings of $100,000x but no net
capital gain. S’s pro rata share of FC’s 1988 ordinary earnings was $50,000x. S’s loan remained
outstanding throughout 1988; the highest loan balance during 1988 was $74,000x. Of S’s share of
the ordinary earnings of FC of $50,000x, $24,000x is deemed distributed to S. This is the amount
by which the highest loan balance for the year ($74,000x) exceeds the portion of the undistributed
earnings of FC deemed distributed to S in 1987 by reason of the pledge ($50,000x). S may make
the election under section 1294 to extend the time for payment of its tax liability on $26,000x,
which is the amount by which S’s includible amount for 1988 exceeds the amount deemed
distributed to S during 1988.
(c) Time for making the election.—
(1) In general.—An election under this § 1.1294-1T may be
made for any taxable year in which a shareholder reports income pursuant to section 1293. Except
as provided in paragraph (c)(2), the election shall be made by the due date, as extended, of the tax
return for the shareholder’s taxable year for which the election is made.
(2) Exception.—An election under this section may be made within 60 days of receipt of
notification from the QEF of the shareholder’s pro rata share of the ordinary earnings and net
capital gain if notification is received after the time for filing the election provided in paragraph
(c)(1) (and requires the filing of an amended return to report income pursuant to section 1293). If
the notification reports an increase in the shareholder’s pro rata share of the earnings previously
reported to the shareholder by the QEF, the shareholder may make the election under this
paragraph (c)(2) only with respect to the amount of such increase.
(d) Manner of making the election.—
(1) In general.—A shareholder shall make the election
by (i) attaching to its return for the year of the election Form 8621 or a statement containing the
information and representations required by this section and (ii) filing a copy of Form 8621 or the
statement with the Internal Revenue Service Center, P.O. Box 21086, Philadelphia, Pennsylvania
19114.
(2) Information to be included in the election statement.—If a statement is used in lieu of
Form 8621, the statement should be identified, in a heading, as an election under section 1294 of
the Code. The statement must include the following information and representations:
(i) The name, address, and taxpayer identification number of the electing share-
holder and the taxable year of the shareholder for which the election is being made;
(ii) The name, address and taxpayer identification number of the QEF if provided to
the shareholder;
(iii) A statement that the shareholder is making the election under section 1294 of
the Code;
(iv) A schedule containing the following information:
(A) the ordinary earnings and net capital gain for the current year included in
the shareholder’s income under section 1293;
(B) the amount of cash and other property distributed by the QEF during its
taxable year with respect to stock held directly or indirectly by the shareholder during that year,
identifying the amount of such distributions that is paid out of current earnings and profits and the
amount paid out of each prior year’s earnings and profits; and
(C) the undistributed PFIC earnings tax liability (as defined in paragraph (f) of
this section) for the taxable year, payment of which is being deferred by reason of the election
under section 1294;
(v) The number of shares of stock held in the QEF during the QEF’s taxable year
which gave rise to the section 1293 inclusion and the number of such shares transferred, deemed
transferred or otherwise disposed of by the electing shareholder before the end of the QEF’s
taxable year, and the date of transfer; and
(vi) The representations of the electing shareholder that—
(A) No part of the QEF’s earnings for the taxable year is includible in the
electing shareholder’s gross income under either section 551 or 951 of the Code;
(B) The election is made only with respect to the shareholder’s pro rata share
of the undistributed earnings of the QEF; and
(C) The electing shareholder, upon termination of the election to extend the
date for payment, shall pay the undistributed PFIC earnings tax liability attributable to those
earnings to which the termination applies as well as interest on such tax liability pursuant to
section 6601. Payment of this tax and interest must be made by the due date (determined without
extensions) of the tax return for the taxable year in which the termination occurs.
(e) Termination of the extension.—The election to extend the date for payment of tax will be
terminated in whole or in part upon the occurrence of any of the following events:
(1) The QEF’s distribution of earnings to which the section 1294 extensic pay tax is
attributable; the extension will terminate only with respect to the tax attributable to the earnings
that were distributed.
(2) The electing shareholder’s transfer of stock in the QEF (or use thereof as security
for a loan) with respect to which an election under this § 1.1294-1T was made. The election will be
terminated with respect to the undistributed earnings attributable to the shares of the stock
transferred. In the case of a pledge of the stock, the election will be terminated with respect to
undistributed earnings equal to the amount of the loan for which the stock is pledged.
(3) Revocation of the QEF’s election as a QEF or cessation of the QEF’s status as a
PFIC. A revocation of the QEF election or cessation of PFIC status will result in the complete
termination of the extension.
(4) A loan of property by the QEF directly or indirectly to the electing shareholder or
related person, or a pledge or guarantee by the QEF with respect to a loan made by another party
to the electing shareholder or related person. The election will be terminated with respect to
undistributed earnings in an amount equal to the amount of the loan, pledge, or guarantee.
(5) A determination by the District Director pursuant to section 1294(c)(3) that collec-
tion of the tax is in jeopardy. The amount of undistributed earnings with respect to which the
extension is terminated under this paragraph (d)(5) will be left to the discretion of the District
Director.
(f) Undistributed PFIC earnings tax liability.—The electing shareholder’s tax liability attribu-
table to the ordinary earnings and net capital gain included in gross income under section 1293
shall be the excess of the tax imposed under chapter 1 of the Code for the taxable year over the
tax that would be imposed for the taxable year without regard to the inclusion in income under
section 1293 of the undistributed earnings as defined in paragraph (b)(3) of this section.
Example. The facts are the same as in § 1.1294-1T(b)(3), Example (1), with the following
exceptions. S, a domestic corporation, did not dispose of any FC stock in 1987. Therefore, because
S held 50 percent of the FC stock throughout 1987, S’s pro rata share of FC’s ordinary earnings
was $50,000x. In addition to $50,000x of ordinary earnings from FC, S had $12,500x of domestic
source income and $6,000x of expenses (other than interest expense) not definitely related to any
gross income. These expenses are apportioned, pursuant to § 1.861-8(c)(2), on a pro rata basis
between the domestic and foreign source income—$1,200x of expenses, or one-fifth, to domestic
source income, and $4,800x of expenses, or four-fifths, to the section 1293 inclusion. FC paid
foreign taxes of $25,000x in 1987. Accordingly, S is entitled to claim as an indirect foreign tax
credit pursuant to section 1293(f) a proportionate amount of the foreign taxes paid by FC, which is
$12,500x ($25,000x × $50,000x / $100,000x). S is taxed in the U.S. at the rate of 34 percent. The
amount for payment is determined as follows:
1987 Tax Liability (with section 1293 inclusion)
| Source | U.S. | Foreign | |
| Income | . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 12,500x | 0 |
| Section 1293 | . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 0 | 50,000x |
| – | – | ||
| Expenses | . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 1,200x | 4,800x |
| Taxable Income |
11,300x
|
45,200x
|
| Total Taxable income | . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 56,500x |
| U.S. income tax rate | . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | x34% |
| Pre-credit U.S. tax | . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
19,210x
|
| Foreign tax credit | . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | – 12,500x |
| 1987 Tax Liability | . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
6,710x
|
1987 Tax Liability (without section 1293 inclusion)
| Source | U.S. | Foreign | |
| Income | . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 12,500x | 0 |
| Expenses | . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | – 6,000x | |
| Taxable Income | . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
6,500x
|
|
| U.S. tax rate | . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | x34% | |
| U.S. Tax | . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
2,210x
|
|
| Foreign tax credit | . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 0 | |
| Hypothentical 1987 Tax Liabilty | . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
2,210x
|
The amount of tax, payment of which S may defer pursuant to section 1294, is $4,500x ($6,710x
less $2,210x).
(g) Authority to require a bond.—Pursuant to the authority granted in section 6165 and in the
manner provided therein, and subject to notification, the District Director may require the electing
shareholder to furnish a bond to secure payment of the tax, the time for payment of which is
extended under this section. If the electing shareholder does not furnish the bond within 60 days
after receiving a request from the District Director, the election will be revoked.
(h) Annual reporting requirement.—The electing shareholder must attach Form 8621 or a
statement to its income tax return for each year during which an election under this section is
outstanding. The statement must contain the following information: (1) the total amount of
undistributed earnings as of the end of the taxable year to which the outstanding elections apply;
(2) the total amount of the undistributed PFIC earnings tax liability and accrued interest charge as
of the end of the year; (3) the total amount of distributions received during the taxable year; and
(4) a description of the occurrence of any other termination event described in paragraph (e) of
this section that occurred during the taxable year. The electing shareholder also shall file by the
due date, as extended, for its return a copy of Form 8621 or the statement with the Philadelphia
Service Center, P.O. Box 21086, Philadelphia, Pennsylvania 19114. [Temporary Reg. § 1.1294-1T.]
[T.D. 8178, 2-26-88.]